NY futures continued to slide this week, with March dropping another 74 points to close at 70.90 cents.

Ever since closing at a 3-1/2-month high of 72.54 cents ten sessions ago, the market has started to trend lower, with the chart now clearly displaying a series of lower highs. Even though the market managed to rebound impressively from intra-day lows on several occasions, the momentum has started to shift to the downside.

As the latest CFTC Commitment of Traders report has shown, speculators bought a massive amount of futures and/or options during the week of November 16-22. Speculators added 2.56 million bales to bring their total net long to 11.02 million bales, which is an all-time record. However, speculators got relatively little bang for the buck since the market closed just 176 points higher during that period.

The trade was opposing this onslaught of spec buying with full force, since it added 2.49 million bales to its net short position, which amounted to a rather substantial 17.75 million bales as of November 22. Grower selling above 72 cents was apparently still strong enough to stop speculators in their tracks.

These rather substantial positions by the specs and the trade have grown even bigger this week, because open interest has gone up another 5,000 contracts over the last five sessions, with total open interest in futures now at 25.65 million bales, of which 18.4 million are in the March contract!

These large opposing forces all but guarantee that the market will see some wild swings over the coming months. Most members of the trade feel that this record spec net long position can’t possibly be sustained and that it will sooner or later get flushed out, similar to what we saw happening on previous occasions.

However, the counterargument is that it might be the trade that is in trouble with its 9.37 million bales in unfixed on-call sales, of which 4.24 million bales are in March alone! This, plus a sizeable basis-long position by merchants are adding up to tremendous support underneath the market and as we tried to explain last week, the trade will have to buy most of its short back by latest the middle of June.

With inflation expectations on the rise, it may become more difficult to defenestrate spec longs. With interest rates and oil prices surging, traders are bracing for higher inflation in 2017, although how high it might go is still anybody’s guess. But such an environment generally bodes well for commodity prices!

We also need to watch the US dollar, which we expect to weaken next year when the market finds out how much the US fiscal deficit is going to balloon as the result of tax cuts, infrastructure spending and higher debt service payments. In other words, there will be a lot of fiscal pain before there is going to be any economic gain! A weaker US dollar would also act in support of commodities.

US export sales for the week that ended on November 24 amounted to a respectable 207,200 running bales of Upland and Pima cotton. There were 18 markets buying, while 21 destinations received shipments of 145,800 running bales. For the season we now have commitments of 7.3 million statistical bales, of which 2.85 million bales have so far been exported.

The US harvest continues to make excellent progress, with just about 10 million bales classed as of today. Based on the field reports we have been getting, we still feel that the US crop will ultimately exceed the current USDA estimate by around 400-500k bales.

So where do we go from here? Both from a fundamental and a technical point of view the market seems to be ready for a much-anticipated correction. However, we feel that a dip towards 68/69 cents would be met by aggressive trade short covering and may therefore be short-lived. For reasons explained above we don’t see a major flush out of spec longs at this time and feel that the trade is in a weaker position with all its unfixed on-call sales.

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